In response to an insightful reader's request, along with increased attention by the financial media, this week's Digest includes a brief look at Bitcoin and its potential influence on the equity markets. First, the customary Market Review followed by an update on last week's ProShares UltraShort S&P 500 hedge idea.

S&P 500 Index (SPX) 3709.41 gained 45.95 points or +1.25% last week after making another key reversal on Friday and another new intraday high at 3726.70. Could the algos have sold to the top like they did the week before?  Key reversals are minor trend change indicators defined as a higher high for the recent trend and a lower close, forecasting a lower low the next day. If the pullback continues, expect first support around 3600 and then the 50-day Moving Average at 3547.94.

iShares Russell 2000 ETF (IWM) 195.34 added 5.63 points or +2.97% last week twice the % gain as SPX as rotation out of previous leaders into laggards continued while retaining the "decider" title once again.

Invesco QQQ Trust (QQQ) 310.06 gained 8.21 points or +2.72% and like SPX made a key reversal on Friday so expect it to make a lower low today. While the % gain exceed the SPX, it was just short of the IWM. The VanEck Vectors Semiconductor ETF (SMH) 217.16 up 4.65 points or +2.19% last week, also better than the SPX, but not close to the December 8 intraday high at 221.79.

CBOE Volatility Index® (VIX) 21.57 slipped 1.74 points or -7.46% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, also declined 1.74 points or -9.15% ending at 17.27%.

In the IVXM chart below, notice how the 30D HV (Historical Volatility), blue line, leads the IV Index, orange line, lower.

VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts as of last Friday.

With 22 trading days until January expiration, the day-weighted premium between January and February allocated 88% to January and 12% to February for a premium of 12.13% in the green bullish zone.

Since most of the volume and open interest are in the two closest futures contracts measuring the day-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

Bitcoin Introduction

Perhaps a day late and a dollar short, a reader asked us to start including Bitcoin. Until recently, it seemed like it could just fade away like many other new ideas that come and go without attracting sufficient interest with the trading and investing community to continue. Now with news that a few large institutional dealers are joining in, it may develop into something bigger.

While quoted in most to the major trading currencies here is the symbol for Bitcoin in U.S. Dollars (BTCUSD) on the Crypto exchange. Some systems apparently use somewhat different symbols such as (^BTCUSD) or (BTC-USD). On Friday, the quote near the close of regular trading hours was 22,903.72, but it runs continuously.

For those preferring something more like stocks traded on traditional exchanges Grayscale Bitcoin Trust OTC (GBTC) offers a closed-end fund whereas of Friday each share represented .00095080 bitcoins. Using the Crypto quote of 22,903.72 each share had a net asset value of 21.94 while closing at 29.48, up 8.87 points or 43.04% last week. Compared to the net asset value the closing price represented a 34.4% premium. For now, it doesn't appear to have listed options.

Bitcoin Futures trade on the CME with each contract representing 5 bitcoins so each point change represents $5. As of Friday, December futures (BTZ20) closed at 22,860 up 4,840 points or 26.86% for the week. The December contract expires Thursday, December 24. In futures trading terms, volume at 7,105 contracts with open interest of 6,250 falls into the small and thin category. 

January futures (BTF21) closed Friday at 23,240 up 5,075 points or +27.94% for the week. With Friday's volume of 1,797 contracts and open interest of 4,052, it expires on January 29 and should be considered thin for trading purposes.

Both December and January futures contracts have tradable options. December's total open interest of 1,852 contracts has 2X more calls than puts. January's numbers are even smaller at 255 contracts with calls leading puts by 3X.

Implied and Historical Volatility charts.  

With the 30-day Implied Volatility at 73.71 up from 62.85 a week ago and the 21-day Historical Volatility at 89.31 up from 78.84 a week ago, both are considerably lower than they were in March when options volume was even smaller than now as shown by the blue volume chart below the volatility chart.

Any story about futures should only be considered complete when it includes the participants positioning data supplied by the weekly Commitment of Traders report from the Commodity Futures Trading Commission.

Included in the Financial Futures Reports section near the bottom and just above the U.S. Dollar Index the Bitcoin report as of Tuesday, December 15 show the positioning of traders as well as the number of traders in each of five categories. Dealers, Asset Managers, Leveraged Funds, Other Reportable, and Nonreportable positions.

In percentage terms of total open interest of 12,632 contracts, the trader's positions on Tuesday, December 15:

Nonreportables holding the largest long percentage have a reputation of being on the wrong side since they theoretically have less information. The December futures contract closed Tuesday at 19,560 and the next day it broke out above twenty thousand in a wide trading range to close at 20,930, up 7% on the day. Based on this it seems the Leveraged Funds were caught in a thin market short squeeze. If so, any further gains could be limited once their shorts are covered.

Fundamentals, opinions, and related include those who think Bitcoin will replace gold as an inflation hedge. Others think it will more likely remain as a speculative retail trading instrument unrelated to any tangible fundamental value, but that could change if more research and options start flowing as institutions become more involved.

Last Thursday Tom McClellan published an interesting article including charts showing Bitcoin currently leads the S&P 500 Index by 5-days. Should the relationship continue it will likely become a sentiment indicator for speculative retail traders and may generate more futures and options trading.

Hedge Update

ProShares UltraShort S&P 500 (SDS) 12.73 down by .32 points or -2.46% last week.

According to the suggestion in Digest Issue 50 "4 Reasons for Caution [Charts]," after booking the opening of the Jan 15 long 14/17 call spread on Monday of last week it was closed the next day after SDS declined .37 points and closing below the 13 stop in the trade plan. Opened for .34 and then closed for .18 it booked a .16 one-day loss.

Setting the Stage

For the second week, the S&P 500 Index made a Friday key reversal suggesting a lower low the next day. However, should a fiscal support agreement be reached on Sunday it may not go lower unless it sells the news.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, nudged up just 3.31 more points or +.31% last week ending at 1071.41 as upward momentum slowed. Put this indicator in the cautious folder.

Strategy

In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing.  Last week's hedge idea didn't work out but that's not unusual when attempting to pick a bottom, in this case a market top going against the tide.

Bitcoin attracted financial media interest and commentary as it broke out above 20 thousand dollars last week. Since trading appears dominated by retail speculators joining their ranks would amount to trying to ride a bucking bronco at a rodeo.

Summary

Once again, the S&P 500 Index made new closing and intraday highs and another key reversal along with more evidence of rotation out of leading sectors into laggards. This week seasonal strength along with a potential fiscal support agreement keeps the scale tilted toward the bulls. Short covering in a thin market may have played a role in last week's Bitcoin breakout above 20 thousand dollars.